Last checked at 13 Aug 2009 07:34
2Q2009 Earnings Release - 13 August 2009
Performance at a Glance
Table 1: Performance at a Glance
Please refer to the attached pdf
* including FX gain (loss), net interest income, realised & unrealised gains on fixed income products
** based on fee & commission revenue
Sources: EFG-Hermes audited financial statements and management accounts
1H2009 in Review
[1] Includes EGP175.3 million in realised incentive fees and EGP152 million in capital gains on the Prop. Account
Market Commentary
MENA capital markets rebounded during 2Q2009 from the previous six-month's spiral downturn. Tracking world market rallies, rising oil prices and favourable macro and corporate results across the region boosted investor sentiment in general. On average regional valuations increased close to 20% over 1Q2009 across the region, but still well below 2Q2008 levels, with the largest gains being witnessed on the Egyptian and Qatari exchanges. Volumes traded recovered by an average of c.77%, again reaching levels well below 2Q2008, with the largest gains witnessed in the markets where institutional clients have cautiously re-entered the market, namely Egypt, Kuwait and Qatar. More interestingly, there was a report published by the Economist Intelligence Unit (EIU) citing that the MENA region would consistently outperform every other region in the world for the next five years.
Looking at the main markets where EFG-Hermes operates, the general trends have been positive and reflected in increased executions for the Group as a whole. In Egypt, the market witnessed a strong rally throughout most of 2Q2009 that was broken by a sharp correction in the final week of June. The rally was largely driven by local retail interest, a growing segment of EFG-Hermes' client base, with foreign institutional buyers becoming net buyers towards the end of the quarter as the rally matured. Activity on the DFM and ADX more than doubled over the quarter with valuations slipping towards the end of the quarter but well above 1Q2009 levels. In Saudi Arabia, the beginning of the quarter was marked by positive momentum with valuations rising sharply before correcting 11.6% in June. Valuations remain above GCC averages but ended the quarter with sizeable increases in both market valuations and volumes traded.
With fragile improvements in market conditions across the region, investor sentiment is slowly giving faint signs of a solid road to recovery across the region, EFG-Hermes managed to maintain its leadership position across the region. Across all business lines, the various Teams have worked on capitalizing on past experience and track record to tap into business segments previously not ventured into; be it debt issuance in Investment Banking, listing of participation notes by Brokerage or re-domiciling funds to capture an increased client base. The new client relationship management system was launched, albeit at a low penetration rate to begin with, to better coordinate marketing and client pitching to ensure that the firm as a whole is providing an integrated service to the client thus ensuring, to a large extent, their exclusivity with respect to regional services.
Despite the frail recovery in regional capital markets in general, the volatility to EFG-Hermes' business model remains elevated and hence the pursuit of a universal banking platform remains key. Management has continued to be strict with respect to implementing the cost-cutting plan whilst ensuring the Group's diverse geographic presence, increasingly varied client base and growing array of services remain intact as they remain the Firm's competitive edge with respect to competition not only from the global investment banks (that are back to adamantly pursuing their expansion into the region) but also its regional competitors (some of whom are regaining their balance after the financial crisis).
Table 2: Performance of Markets in the Arab Region during 2Q2009
Please refer to the attached pdf
Sources: Regional markets and EFG-Hermes
Performance
Total Revenue
Table 3: Breakdown of Total Revenue
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* including FX gains (losses), net interest expense and realised & unrealised gains on fixed income (EGP21.4 mn) in 2Q09
Sources: EFG-Hermes audited financial statements and management accounts
EFG-Hermes' total net consolidated revenue increased 17% over 1Q2009 levels to EGP382 million. Total revenue booked a 52.6% decline over 2Q2008 level of EGP807 million. It must be noted however that in 2008 the Firm had a Prop Account that reined in EGP152 million in net revenue, an activity that was discontinued during the latter part of 2008, and that market conditions had allowed Asset Management to charge a total of EGP179.3 million in incentive fees. Taking revenue from the Prop Account and incentive fees into account, the decline is only 19.6% compared to declines of 26.8% and 45.6% in market volumes and valuations respectively over the similar period.
Revenue booked from Bank Audi slightly increased to EGP109 million but its contribution to total revenue increased to 28.4% of total consolidated revenue up from 12.6% in 2Q2008, as total fees and commission more than halved, contributing only 57.4% to total revenues down from over 70% a year earlier, but still remaining the main contributor to revenue. Having said that, fees and commission revenue has seen improvement over 1Q2009, increasing 45.4% reflecting the pickup in capital market activity.
As revenue from the agency business declined as a proportion of total revenues, revenues booked from treasury operations increased to EGP47 million2 up from a loss of EGP24 million in 2Q2008 and down from EGP88 million in 1Q2009, maintaining the revenue of the Investment Bank around 70% of the total revenue. The continued contribution of the Treasury Department to the total revenue in a declining interest rate environment hinges upon its continued participation in the fixed income market, whether Egyptian Eurobonds, treasury bills or corporate bonds.
Operating Revenues
After two consecutive quarters of decline operating revenues witnessed a slight rebound as improved investor sentiment increased activity across all regional markets. Total operating revenues increase to EGP224 million, a 51.2% increase over 1Q2009. Although a 69.8% decline over 2Q2008, operating revenues reflect the decent market shares across the region as well as the relative stability of the level of assets under management since the end of the year attesting to EFG-Hermes' strong positioning as the region's premier investment bank and the continued investor confidence in the Firm despite volatile market conditions. On a semi-annual basis and after neutralising the effect of the discontinued proprietary activity and incentive fees booked during 1H2008 (EGP209.9 million), 1H2009 total operating revenues were 55.2% below operating revenues booked in 1H2008. With the closure of the Prop. Account, total operating revenue is basically revenue booked through the agency business.
2 Includes EGP23.4 million of net interest and bank charges, EGP21.4 million of realised and unreaslised capital gains on fixed income and FX loss of EGP8.1 million
Table 4: Contribution of the Different Divisions to Operating Revenue on a Quarterly Basis
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* excluding Treasury Operations
Sources: EFG-Hermes audited financial statements and management accounts
Table 5: Contribution of the Different Divisions to Operating Revenue on Half Year Basis
Please refer to the attached pdf
Sums and percentages may not add up exactly due to rounding
* excluding Treasury Operations; no Principal Account during 1H2009
Sources: EFG-Hermes audited financial statements and management accounts
Brokerage operations remained the core contributor to business booking 66.6% of total operating revenues up from 56.3% and 40.9% in 1Q2009 and 2Q2008 respectively as the incentive fees continue to be non-existent and closing investment banking deals remains difficult due to market conditions. Asset Management is the second largest contributor to revenue, booking 18% of total consolidated operating revenues down from 44.6% in 2Q2008 predominantly due to the decline in assets under management from its all time high of EGP41.4 billion to EGP22.3 billion as at the end of 2Q2009. In absolute terms operating revenue booked from Private Equity remained nearly constant at around EGP25 million in management fees per quarter as no new funds were raised and no major exits were concluded to earn success fees. In line with the Group's regionalisation and geographic expansion strategy the Investment Bank's revenues emanating from the region totaled 53.6%3 in 2Q2009 down from 59.2% a year earlier and expected to further increase as the full effect of the Saudi, Kuwaiti, Qatari and Omani business comes and regional market recovery is sustained.
3 Including the revenues from trading regional markets that are reported within Brokerage Egypt numbers and excluding revenue of Prop. Account
Hereunder is an analysis of the company's main operational divisions:
Brokerage
Brokerage activities remained the key contributor to fee and commission revenues. With volumes across equity capital markets increasing on average 43.4% and EFG-Hermes maintaining its market shares across its major markets, Brokerage revenue nearly doubled over 1Q2009 levels to EGP126 million. The increase in volumes across the markets where the Firm has physical presence was varied as institutional investors, the Group's main clients; comeback was disparate across regional markets. Having said that, increasing online and retail operations have supported the overall Brokerage revenue and maintained the Group's overall market shares.
After the success of sponsoring the First Egypt Day on the London Stock Exchange during 4Q2008, EFG-Hermes Brokerage has partnered with LSE to launch the first MENA Financial Institutions Day during May and the First Saudi Day on the LSE during June 2009, both which attracted a large number of investors, presenting companies and officials from the region.
A growing segment of Brokerage business across all regions, in both volumes traded and commissions, is the VIP desk. This Team handles clients that are too small to be handled by the high networth individuals Team but larger than the normal retail clients.
Egypt
During 2Q2009 valuations and volumes traded on EGX increased by 32% and 173.9% respectively over 1Q2009 levels while growth in EFG-Hermes executions on the market increased 126% to EGP43 billion resulting in a 40% market share of total executions and maintained the #1 position on EGX.
Figure 6: EFG-Hermes Executions and Share of Total Market Executions
Please refer to the attached pdf
Sources: EGX and EFG-Hermes
With the retail business becoming a more important component of brokerage activity in Egypt, both Online Brokerage and Call Centre activities operations have picked up further during 2Q2009. The number of clients using the Online service increased 38.6% over 1Q2009 and with increased market executions, total commissions booked more than doubled over 1Q2009.
Revenue from brokerage activity in Egypt decreased 52.6% over 2Q2008 levels to EGP84 million. This is an increase of nearly 53% over 1Q2009 levels echoing the increase in both volumes and values traded on the EGX over 2Q2009 and constituting 38.2% of the Group's consolidated revenue during the quarter.
UAE
Figure 7: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: DFM, ADX and EFG-Hermes
EFG-Hermes' market share continued to decline as institutional investors continued to shy away from the markets. Market shares on the DFM and ADX declined to 10.1% and 11.8% respectively, however, the Firm maintained its #1 broker positioning. Total executions during 2Q2009 nearly doubled over 1Q2009 levels to USD2.4 billion compared to growth in market volumes of 113% and 153% in volumes on the DFM and ADSM respectively coupled with small increases in valuations in both markets over the similar period.
Although not as large as the operations in Cairo, Online trading in the UAE has picked up over the year with an average commission well above that charged for the normal brokerage activities.
Revenues from Brokerage operations out of the UAE have increased nearly three-fold over 1Q2009 as volumes traded more than doubled during 2Q2009. Still 41.1% below 2Q2008 levels, revenues booked in 2Q2009 reached the equivalent of EGP21 million constituting 9.7% of the Group's total consolidated operating revenues.
Saudi Arabia
Figure 8: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: TADAWUL and EFG-Hermes
The Group's total executions increased 11.8% to SAR3.2 billion but have not matched the growth in market volumes as retail dominated the activity on the exchange. The listing of the participation notes mentioned above will play a pivotal role in increasing the Group's market share going forward.
Oman
Figure 9: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: Oman Stock Exchange and EFG-Hermes
As EFG-Hermes consolidated its presence in the Omani market, the Firm's executions began to pick up as the market recovered 21.3% in terms of value and 123.7% in volume. Although not back to 3Q2008 levels, total executions by EFG-Hermes increased 101.5% over 1Q2009 to OMR135 million ending the quarter as the # 4 broker on the exchange.
Revenues consolidated from Vision Securities' activities recorded the equivalent of EGP4 million in agency fees, slightly above what was booked in 1Q2009, corresponding to 2% of the Group's consolidated operating revenues during 2Q2009.
Kuwait
Figure 10: Progression of Volumes Executed and Share of Total Market Executions
Please refer to the attached pdf
Sources: Kuwait Stock Exchange and EFG-Hermes
Volumes in Kuwait, the second largest market in the region after Saudi Arabia, ended 2Q2009 only 9.4% below 2Q2008 levels and increased 180.7% over 1Q2009 levels. Valuations on the other hand increased only 19.8% over 1Q2009 levels but remain around 48% below 2Q2008 levels. In the back drop of improving market conditions coupled with fully integrating the subsidiary's operations, EFG-Hermes IFA's executions reached KWD2.83 billion in 2Q2009; increasing 1% over 2Q2008 and nearly tripling since 1Q2009. The Group's market share has reached its highest level since EFG-Hermes entered the Kuwaiti market recording 30.17% and ensuring the Firm continues to oscillate between the #1 and #2 positions during the quarter. This positioning was supported by foreign institutional clients returning slowly to the Kuwaiti market as well as the Firm's increasing penetration of the retail and high networth segments of the market.
With marked improvement in market volumes and valuations combined with the increased market shares, the Kuwaiti subsidiary managed to book the equivalent of EGP32 million in revenue during 2Q2009 corresponding to 14.6% of the Group's total operating revenues.
Research
Figure 11: Development of Active Research Coverage
Please refer to the attached pdf
Source: EFG-Hermes
During 2Q2009 the Research Department reached record publication levels producing a total of 150 reports with 1,201 pages up from 105 reports (1,010 pages) in 1Q2009 and 143 reports (1,464 pages) in 1H2008. The Team ended 1H2009 with 87 stocks under coverage up from 75 a year earlier.
Asset Management
Figure 12: Development of Listed Assets under Management (totals in EGP bns)
Please refer to the attached pdf
Source: EFG-Hermes
Assets under management edged up slightly during 2Q2009 on the back of the general rebound of regional capital markets and improving momentum in the business. As at the end of 2Q2009, total assets under management increased 8.4% to USD3.982 billion up from USD3.673 billion as at the end of 1Q2009. The growth in assets under management reflected the general market conditions as approximately USD330 million of the increase was related to market effect. Net cash outflows were minimal over the quarter (USD20.6 million). Egypt-centric funds and discretionary portfolios experienced net cash inflows of USD16.3 million while the funds and portfolios with a regional focus had net cash outflows of USD36.9 million. The size of assets under management as at the end of 2Q2009 is down 48.4% from the all time high of USD7.72 billion as at the end of 2Q2008 with 53.4% of the decline as a result of changes in market valuations. At the beginning of 2Q2009, the Team was mandated by Bank Audi in Egypt to manage a money market fund which was launched at EGP139 million. Furthermore, EFG-Hermes Asset Management also started managing HSBC's Amanah GCC Equity Fund as well as the HSBC Amanah GCC ex- Saudi Equity Segregated Portfolio.
Additionally, over the quarter the Team added several new equity and fixed income discretionary mandates totaling USD51 million.
Asset Management revenues decreased 84.4% over 2Q2008 to EGP40 million as assets under management declined and the lower-earning money market and fixed income portfolios increased as a proportion of total assets under management. Setting aside the incentive fees which were non-existent since 3Q2008, total revenues booked by Asset Management declined 46.8% over 2Q2008 mirroring the 45.8% decline in assets under management over the similar period and the increase of money market funds within the overall assets under management. Asset Management contributed 18% to the Group's consolidated net operating revenues.
Investment Banking
The challenging market conditions continued into the second quarter 2009. With markets continuing to be quite volatile, regional equity raising activities remained scant with only a few, small domestic IPOs being launched in Saudi Arabia. As a result, even though EFG-Hermes continued to build a very healthy pipeline of IPOs out of the region as a whole, those mandates are likely to remain on hold for the remainder of 2009 unless a major shift in sentiment takes place.
As with the previous two quarters, the Team continued to be proactive in expanding the M&A side of the business. During 2Q2009, EFG-Hermes Investment Banking closed the USD1.6 billion merger between Palestine Telecom and Zain Jordan; a complex deal that witnessed a number of delays throughout the first few months of the year. This transaction is the largest regional M&A transaction to date this year and was concluded during tough market conditions. During the quarter, the Team managed to book retainer and consultancy fees from several Egyptian and regional corporates.
Unfortunately though, complications in another deal that was at the document finalisation stage proved to be too difficult to overcome and the deal fell through causing the Team to erase the deal size from the total of M&A transactions closed this year. It was the USD460 million acquisition of the third Iranian license by Etisalat.
During the first three weeks of July, the Team successfully concluded the transaction of Actis' acquisition of 9.3% of Commercial International Bank for a total of USD243 million with EFG-Hermes acting as the buy-side advisor in the largest M&A transaction on the Egyptian market this year. The Team also managed to advise an oil company on a debt arrangement mandate for a total of USD1.1 billion that was fully underwritten by the debt syndication. This is likely to remain one of the largest debt arrangements in the region this year. The drawdown of the loan and hence EFG-Hermes's fees are expected before the end of 3Q2009.
Revenues booked by the Investment Banking Division in 2Q2009 recorded EGP9 million compared to EGP51 million during 2Q2008, contributing 3.9% to the Group's consolidated revenues
Private Equity
Private Equity made distributions in excess of USD50 million primarily from Sahara North Bahariya SPV as well as Horus II. Horus II distributed USD27 million (17.6% of the capital committed) during 2Q2009 as several profitable exits were concluded bringing the capital distributions to date to 96% of the Fund size following the large distribution in 2007. As a result funds under management 4 with Private Equity declined to USD1.029 billion.
After the signature of the memorandum of understanding with CDC, CDP and CDG for the launch of the InfraMed Initiative, progress was made on finalising the fund structure between the Sponsors. EFG-Hermes will operate and manage an Egypt-dedicated Infrastructure fund under the umbrella of Inframed; this fund will receive 20% of the aggregate Inframed commitments in addition to direct commitments from regional investors. First closing of the fund is anticipated prior to year end.
Overall market conditions, culminating in market rallies during 2Q2009, has prolonged the bid-ask spread by raising valuation expectations after the February/March lows thereby making it arduous to reach agreement. Therefore, the Team continues to see opportunities both in the early stage, growth capital space where premiums to par remain low, as well as opportunities from forced sellers. Overall activity and pipeline has increased indicating a return of confidence. With respect to competition, some is beginning to bud but for the most part remains benign compared to the situation in early 2008. Nevertheless, fundraising continues to be challenging for generalist funds and the Team's focus for the time being remains on deal specific fundraisings and specialised funds along the lines of the infrastructure fund.
Removing the success fees booked during 2Q2008 (EGP8.4 million), revenues from Private Equity slightly increased in 2Q2009 to EGP25 million as a result of the funds raised during 2Q and 3Q2008. The business line contributed 11.5% to the Group's consolidated operating revenues during 2Q2009.
4 that earn management fees
Operating Expenses
Table 13: Breakdown of Operating Expenses
Please refer to the attached pdf
* adjusted for both monthly bonuses and annual bonuses that have been accrued
Sources: EFG-Hermes audited financial statements and management accounts
EFG-Hermes continued to administer cost cutting well into the second quarter. Although the fully loaded operating expenses increased by 10.8% over 1Q2009 to EGP158 million and down from EGP346.7 million5 in 2Q2008, the increase since the first quarter was mainly due to one-off costs relating to third party expenses and legal fees associated with the launch of new products. Furthermore, it must be noted that costs relating to the Kuwaiti subsidiary were not included during 2Q2008 as the acquisition was concluded during August 2008 and hence the decrease in operating expenses is all the more impressive. Total operating costs relating to the Kuwaiti operation recorded around EGP18 million in 1H2009.
Employee costs remain the largest component of operating expenses. Fully loaded employee expenses increased 14.8% to EGP 93 million in 2Q2009 up from EGP81 million in 1Q2009 as the Group began to accrue annual bonuses; EGP11 million of annual bonuses have been accrued during 2Q2009. Fully loaded employee expenses for 1H2009 declined 51.8% over 1H2008 to EGP175 million. Having said that, 2Q2008 was one of the best quarters that EFG-Hermes experienced during 2008 and hence a large part of the year's bonuses was accrued during that quarter. Adjusting for the accrued bonuses in both 1H2008 and 1H2009 to reflect the underlying fixed employee costs, the adjusted expense decreased by 12% in spite of the firm employing nearly the same number of people (851 employees at the end of June 09 and 853 employees in the similar period 2008).
Looking at employee expenses more closely, the continued decline in the fixed portion of the expense reflects both the finalisation of the redundancy and relocation plan as well as the decrease in salaries introduced in March 2009. The fixed portion of the employee expense is what constitutes the bulk of the cost (65.5% in 2Q2009 compared to 66.6% in 1H2009 and 38.7% in 1H2008), has decreased 22% over the year in spite of the number of employees remaining constant. This directly reflects the decrease in salaries introduced to the Group's top 200 employees.
The only component of employee expenses that has increased over 1H2008 levels is the portion relating to the Management Incentive Scheme that was renewed and expanded at the beginning of 2009. 2008 and partly in 2009 is the last period when the Firm would enjoy the merits of the 2004 Management Incentive Scheme where the bulk of the scheme was funded when the share price was low and hence allowed for cost to revenue ratios to remain well below industry standards. It should be noted that starting 2010 the full cost of the new program will take effect.
Overall on a half year basis, as operating revenues declined by around 71% due to market conditions, fully loaded employee expenses shot up to 47.1% of total operating revenue from 28.8% in 1H2008. Conversely employee expenses declined to 58% total operating expenses in 1H2009 down from 67.4% in 1H2008 as cost curbing measures filtered through.
Other operating expenses include occupancy expenses, office expenses, communication expenses (data and telecommunication), travel and marketing expenses, promotion and advertising expenses and consultant and service fees, all of which have declined over 1H2008 levels as the cost curbing measures were immediately implemented starting the end of 4Q2008. Other operating expense declined 27.8% over 1H2008 levels to EGP127 million down from EGP175 million a year earlier when the Group's operating expenses did not include the Kuwaiti operations. Other operating expenses in 2Q2009 increased 5.7% over 1Q2009 levels mainly as a result of an increase in office expenses, legal fees and events planning and hence netting out cost savings in expenses relating to travel, and data communication in 2Q2009. During 2Q2009, the Group paid the costs relating to the maintenance of the Nile City premises for both 1Q and 2Q2009. The cost of events planning increased to EGP 4 million in 2Q2009 up from EGP2.2 million in 1Q2009 as EFG-Hermes settled the remaining payments for the annual One-on-One Conference, launched the first ever Saudi Capital Markets Day on the London Stock Exchange and the first MENA Financial Services Capital Markets Day on the London Stock Exchange, both of which were very successful and well attended. This is compared to a total of EGP17.7 million spent on events during 1H2008. Legal fees also increased over 2Q2009 as the ground work for the launch of the InfraMed Fund and other products in the pipeline.
Total operating expenses for the six months ended June 2009 declined 44% over the similar period the previous year (20.1% if adjusted for bonuses). The major cost savings came in the promotional and advertising expenses decreasing 67.1% to EGP 9.2 million in 1H2009 as a result of limiting events to those hosted by EFG-Hermes. Travel and marketing expenses decreased 59.8% to EGP10.7 million as the new travel policy was introduced, where traveling was kept to a minimum and only authorised when business would be hampered by the use of video or conference calling facilities. Another major expense that contributed significantly to the decrease was limiting the donations to what had been approved by the general assembly to the EFG-Hermes Foundation.
As market conditions changed, fee and commission revenue declined by 64% in 1H2009 to EGP370 million down from EGP1.039 billion resulting in net operating profits of EGP68.5 million in 1H2009 down from EGP500.4 million in 1H2008 (of which EGP209.9 million were incentive fees). EFG-Hermes's net operating margin (based only on agency business) was put under pressure declining to 18.5% down from 48.2% in 1H2008 (35% if adjusted for the realised incentive fees). However, this signifies an improvement as the Investment Bank had only broken even during 1Q2009 given the near collapse of the investment banking industry in general and the dire conditions all of EFG-Hermes regional competitors experienced and continue to do so.
5 EGP174.5 mn of bonuses were accrued during 2Q2008
Other Revenue
The major components of other revenue are the consolidated portion of EFG-Hermes' 27.87% ownership stake in Bank Audi Saradar and the net income from treasury operations and balance sheet management.
Banque Audi: With capital markets continuing to be frail and volatile, revenue from the stake owned in Bank Audi continues to be significant both as a result of revenue from the Investment Bank continuing to be below levels recorded last year coupled with the quarter on quarter growth in the Bank's performance. Revenue consolidated from the Bank Audi stake although only slightly increase from 2Q2008 to EGP109 million, recorded a 28% increase over 1Q2009 and constitutes 28.4% of EFG-Hermes' total consolidated revenues up from 12.6% in 2Q2008.
Treasury Operations: The importance of Treasury operations has continued into 2Q2009. With EFG-Hermes remaining close to debt-free and the Treasury Department continued to resort to fixed income operations to counter the declining interest rate environment. Net revenue from Treasury operations totaled EGP135 million in 1H2009 up from a loss of EGP30 million in 1H20086 . With earnings of EGP47 million in 2Q2009, revenues from the Treasury operations constituted 12.3% of total revenue in 2Q2009.
Of the total revenue booked in 1H2009 by the Treasury Department, EGP 19 million relate to FX gains as the EGP slightly depreciated during the second quarter (from 1USD=EGP5.597 in 1Q2009 to EGP5.616 in 2Q2009), EGP57.7 million of net interest income7, and the remainder being the net realised and unrealised capital gains on the fixed income positions, including sovereign and corporate bonds and other fixed income positions.
6 approximately EGP48 million of the EGP69.3 million in FX loss for 1H2008 are not a genuine loss as the FX investments and currency were mostly hedged but the positive effect of the hedge contracts are put through the income statement only when these contracts mature
7 interest and quasi interest earned on the cash balances less interest paid to the banks, including DEG and IFC for the long term loans, and other bank expenses and charges
Balance Sheet
EFG-Hermes' balance sheet continued to be strong, liquid, unleveraged and free of toxic assets. High levels of cash, cash equivalents and other investments (namely T/Bills, bank deposits and investment in money market funds and fixed income products8) reaching EGP2.783 billion down from EGP3 billion at the end of 2008. The Investment Bank turning profitable during 2Q2009 after breaking even during 1Q2009 ensuring that the Group did not burn cash during 1H2009 and has the firepower to expand its business whether organically or through acquisitions at anytime and is able to continue work on its multi-million dollar new headquarters at the Smart Village.
After winding down the Principal and Proprietary Trading accounts during the latter part of 2008, the Group has not engaged in that activity. Accordingly, changes on the available for sale investments, from EGP660 million as at the end of 1Q2009 up to EGP758 million as at the end of 2Q2009, is due to the change in the market valuations that have caused the value of the Group's stake in SODIC to increase to a total of EGP270.3 million up from EGP145.8 million as at the end of 1Q2009 as the investment was marked-to-market.
Total receivables and payables resulting from operations resulted in a net payable to clients of EGP270.2 million incurred mainly due to the normal course of business concentrated within the Brokerage and Asset Management divisions. This is down from EGP344.1 million as at the end 2008. Such balances relate to the daily operations and have since been settled.
The increase in property, plant and equipment since the end of 2008 from EGP376 million to EGP405.7 million relates to the continued work on EFG-Hermes' new headquarters in Egypt.
As at the end of 2Q2009 the treasury shares for a total of EGP94.8 million correspond to a total of 5,150,000 shares that the Firm's extraordinary general assembly approved redeeming on 7th April 2008 and the change has been finally approved by the Capital Market Authority after the end of the quarter.
On the liability side, the Group continues to carry very little bank debt. The only debt outstanding as at the end of 2Q2009 is a total of EGP111.4 million down from EGP129.1 million as the Group adheres to its repayment schedule.
As at the end of 2Q2009 shareholders' equity increased to EGP8.18 billion up from EGP7.97 billion as at the end of 2008 in spite of having a total of EGP94.8 million worth of treasury shares on the balance sheet.
8 EGP587 million of investment in money market funds and bond is reported in the EGP622 million trading investment figure
Taxes
The effective tax rate for 2Q2009 has decreased to 7.7% down from 11.3% in 1Q2009 as revenues emanating outside Egypt and from non-taxable entities have increased. However, the overall effective tax rate for 1H2009 has risen to 9.35% up from 8.28% in 1H2008 as revenues from taxable entities increased. Nevertheless, the effective tax rate is well below the 20% tax rate set for Egyptian companies given that the Firm continues to administer tax management at the level of the Group as a whole, as well as optimising balance sheet management revenues.
Profitability
Given the ominous market conditions that continued into the second quarter, it is not a surprise that net profit after tax and minority interest is well below 2008 levels. Net profit after tax and minority interest dropped to EGP316.5 million in 1H2009 compared to EGP757.7 million in 1H2008. It is noteworthy to mention that market rallies during 2Q2009, coupled with slightly improved investor sentiment, has contributed to over 55% of 1H2009's net profit after tax and minority interest booked during 2Q2009. In addition to that, of the bottom line in 1H2008, EGP209.9 million related to incentive fees realised on the listed equity funds and portfolios and EGP223 million to the Prop. Account with none booked during 1H2009. Accordingly, after adjusting for the prevailing market conditions and the closure of the Prop. Account, net profit after tax and minority interest in 1H2009 only declined around 3% from EGP324.8 million in 1H2008 although total revenues declined by 52.6% over the similar period.
The majority of the bottom line during 1H2008 related to EFG-Hermes' core operations but with the tides turning as the global financial crisis continues into 2009, the majority of the bottom line relates to treasury operations and revenues consolidated from the Bank Audi investment with the Investment Banking platform contributing around EGP68.6 million to the bottom line.
In this earnings release EFG-Hermes may make forward looking statements, including, for example, statements about management's expectations, strategic objectives, growth opportunities and business prospects. Such forward looking statements by their nature may involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by these statements. Examples may include financial market volatility; actions and initiatives taken by current and potential competitors; general economic conditions; and the effect of current, pending and future legislation, regulations and regulatory actions. Furthermore, forward looking statements contained in this document that reference past trends or activities should not be taken as a representation that such trends or activities will continue. EFG-Hermes does not undertake any obligation to update or revise any forward looking statements. Accordingly, readers are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made.
This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities or interests described within it in any jurisdiction. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.
EFG-Hermes Holding SAE has its address at 58 El Tahrir Street, Dokki, Giza and has an issued capital of EGP 1,939,320,000.
المجموعة المالية هيرميس القابضة شركة مساهمة58 شارع التحرير- الدقى- الجيزة رأس المال المصدر: 1,939,320,000 جم
Stock Exchange & Symbol: Cairo: HRHO.CA London: HRHOq.LBloomberg: EFGHReuters pages: EFGS .HRMS .EFGI .HFISMCAP .HFIDOM
EFG-Hermes (Holding Main Office)58 Tahrir Street Dokki Egypt 12311Tel +20 2 333 83 626 Fax +202 333 78 038 efg-hermes.com
Please refer to the attached pdf copy of the audited financial statements
http://www.rns-pdf.londonstockexchange.com/rns/3729X_-2009-8-13.pdf
Please refer to the attached pdf copy of the full earnings release including the embedded charts and tables
http://www.rns-pdf.londonstockexchange.com/rns/3729X_1-2009-8-13.pdf